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Costa Rica Inflation May 2019

Costa Rica: Inflation accelerates in May and the Central Bank applies a raft of dovish measures

June 3, 2019

Consumer prices rose 0.14% in May compared to the previous month, down from April’s 0.56% increase. According to the National Institute of Statistics and Census, May’s increase was stoked by higher transport prices but weighed on by lower entertainment and culture prices.

Inflation accelerated to 2.3% in May, up from 2.1% in April, delving further into the Central Bank’s 2.0%–4.0% target range. Annual average inflation remained unchanged from April’s 2.0% in May.

On the monetary policy front, the Central Bank of Costa Rica slashed interest rates by 0.25 percentage points on 22 May, bringing the key policy rate down to 4.75% from 5.00%. The move was taken with an eye on low inflation in recent months and moderate inflationary expectations for the months ahead. In addition, on 3 June, the Central Bank reduced the minimum legal reserve requirements to be held by banks to 12.0% from 15.0% in a bid to shore up lending growth.

Inflation should pick up even further in the coming months, particularly given July’s switch to a value-added tax from a general sales tax, an expected economic growth acceleration and recent Central Bank monetary policy loosening. FocusEconomics Consensus Forecast panelists expect inflation to end this year at 2.8%, which is unchanged from last month's forecast, and 2.9% in 2020.

Consumer prices fell 0.1% in August compared to the previous month, contrasting the 0.7% jump in July, which was a three-and-a-half year high and due to the introduction of an expanded VAT in the month.

Annual economic growth in cyclically-adjusted terms inched up to 1.5% in June from May’s revised 1.4% (previously reported: +1.3% year-on-year), which represented the weakest reading since December 2009.
Growth remained historically subdued in June due to a continued decline in activity in the agriculture sector, which is struggling following a prolonged spell of dry weather, partly due to the El Niño effect.

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